Energy analyst questions lack of firm data as industry looks to hike gas and fuel prices to increase profit margins

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By Mary Moszynski
Times & Transcript Staff

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FREDERICTON - A report calling for higher gas and home-heating oil prices prepared for the Energy and Utilities Board contains significant flaws as it lacks firm data and ignores additional profits, an energy analyst testified yesterday.

Michael Ervin of the Calgary-based consulting firm MJ Ervin & Associates questioned the figures used in a report prepared by Gardner Pinfold Consulting Economists of Nova Scotia that calls for an increase in the price of gasoline by 2.3 cents per litre and an increase in the cost of home-heating fuel by 2.77 cents.

The report, which was commissioned by the Energy and Utilities Board after it launched a review of the profit margins allowed to retailers and wholesalers under the province's regulated price system, said businesses aren't earning enough money.

Credit card fees, labour costs and delivery fees are driving up costs, the report states.

But Ervin argued those costs aren't solely related to the cost of gas pumps but also the additional services many gas stations offer such as convenience stores, movies or liquor agencies.

"The report that Gardner-Pinfold submitted suggested there is no other source for revenue other than from at the pump. This is a very serious error," said Ervin.

One of the shortcomings of the report is that it looks at the costs of these non-petroleum related services but not the profits from those services, said Ervin.

"Going through some of the aspects of the report itself, one thing that became very clear to us was that it wasn't relating to what was there, but what wasn't there," he said.

The Energy and Utilities Board wrapped up its hearings on the report yesterday. There is no timeline for when the board will issue a decision on whether profit margins should change.

Michael Gardner, the report's author, acknowledged earlier this week that many gasoline retailers weren't willing to give him their financial statements, forcing him to rely on more anecdotal evidence.

As well, some of the figures included in the report also raised questions.

Gardner pointed to a 19 per cent increase in minimum wage over the past two years as a reason to increase the profit margins for fuel and gasoline companies. However, it's unlikely every gas station employee earned minimum wage or that each employee received a raise equivalent to the increase in the minimum wage, said Ervin.

To illustrate his point, Ervin pointed to Statistics Canada figures showing that retail wages in the province increased by 3.9 per cent.

As well, it's difficult to quantify how much of an employee's salary should be considered a cost of operating a gas station opposed to operating a convenience store, Ervin said, adding the same question could be asked about credit card fees.

"I would submit that are very few, if any, stations that don't have some sort of convenience store."

Ervin also submitted a proposal to the board in a bid to write the profit margins report but it was rejected. The provincial energy department then retained Ervin to review the report and act as an expert witness during the hearings.

"I can't state exactly how my proposal is worded, but in short, it suggests a different methodology and it specifically addresses the likely difficulty in getting good reliable data from the sector and that observation on my part was a key driver in taking a different approach," Ervin said.

Ervin didn't dispute the idea that profit margins should be raised, and acknowledged there are growing costs for business owners.

Peter Zed, lawyer for Co-op Atlantic, argued that the board should adopt the Gardner report and call on Energy Minister Jack Keir to overhaul the regulated system.

"It's time to go back and not look at whether there should or not should be regulation . . . what we would like to see is meaningful regulation," he said.

For example, a series of industry consultations could be held, followed by some type of legislated escalating cost clause allowing profit margins to increase automatically as minimum wage increases, he said.

Zed also criticized the process of the profit review, saying Gardner was given a mandate that was "virtually impossible to fulfill" as he was given only a few weeks to gather anecdotal evidence and complete the report.

Stephen Davies from Co-op Atlantic said it would have been a struggle to determine how often credit cards are used to purchase gasoline, saying the receipts would have to be separated from those for groceries and other items.

Businesses argued about 40 per cent of their sales are made with credit cards -- a figure that has increased greatly over the past couple of years.

Still, board member Steve Toner questioned why the business wouldn't gather the information.

"If you hired a lawyer, you could have hired an accountant to verify those costs," he said.

"It is available information, you just have to dig for it."